The Myth of the Rational Voter, by Bryan Caplan.#

Extraordinary insights in this book. The ingenuity and incisiveness of Bryan's blog, but lasting for two hundred pages. It is a pleasure to read, and there are new insights constantly. I would highly recommend the CATO book forum about this book, by the way.#

On preferences over beliefs:#

Suppose your friend thinks he is Napoleon. It is conceivable that he got an improbable coincidence of misleading signals sufficient to convince any of u. But it is awfully suspicious that he embraces the pleasant view that he is a world-historic figure, rather than, say, Napoleon's dishwasher. [p. 119]

The chapters on supply side and market fundamentalism are great.#

On immigrants:#

If an Indian desperately wants to move to the United States but is unable to get a vise, voting to make India more like the United States seems like the next best thing. But there is a crucial difference between the two actions. A migrant who leaves his homeland gives up psychological benefits, such as the belief that his nation is the best in the world, in exchange for a big jump in his material well-being. A voter who turns his back on his nation's political tradition gives up psychological benefits but---since policy is beyond his control---is not a penny richer. [p. 206-207]

Bryan Caplan and Edward Stringham expand in Networks, Law, and the Paradox of Cooperation (PDF) on Caplan's critique of the thesis by Tyler Cowen and Dan Sutter that the anarcho-capitalist ideal of private defense firms is impossible due to the structure that industry would form.#

Cowen and Sutter (1999) argue that libertarian doubts about the viability of collusion are inconsistent. How, they ask, can free-market economists be simultaneously optimistic about the private production of public goods, but skeptical about collusion? Collusion is, after all, a public good vis-a-vis competing firms. Cowen and Sutter's challenge may be dubbed the Paradox of Cooperation: Laissez-faire can cope with either the monopoly or the public good problem, but not both.1 Libertarians who dismiss concerns about collusion are at best over-confident.

Cowen (1992) goes further by claiming that in so-called network industries, libertarians are not just over-confident, but wrong: Laissez-faire leads to monopoly, not competition. Although his network industry argument poses a challenge for more moderate libertarians too, Cowen primarily employs it to expose the fundamental weakness of the radical anarcho-capitalist position (Rothbard 1978, Friedman 1989): An excellent example of a network industry is the very free market in defense services that anarcho-capitalists favor. In consequence, anarcho-capitalists are sorely mistaken about the consequences of their ideas if tried.

The paper very much follows the structure of the previously mentioned critique, but is expanded with references and detail.#

The authors bring up the issue of cooperations that are "self-enforcing":#

Cowen here conflates two radically different sorts of business cooperation under the generic heading of "collusion." Standardizing products is essentially a coordination game, fixing prices a prisoners' dilemma. As long as consumers want a uniform product, adhering to industry standards is self-enforcing. As long as consumers prefer to pay less rather than more, price-fixing is not. Ability to reach the cooperative outcome in the former in no way "implies" ability to reach it in the latter.5

The authors also mentions an important point about how to measure the success, or failure, of a collaboration and identify that is possible to have partial success in such endeavours:#

First consider the effectiveness of partial participation. Voluntary collaboration never yields unanimity. But howinjurious is the shortfall? This hinges on the elasticity of outsiders' behavior. Suppose that 50% of all firms in an industry join a cartel to restrict production. They will be unable to raise prices much because outsiders' supply curves will typically be elastic. Firms that refuse to join the cartel increase their output to exploit the situation. Indeed, if outsiders' supply is perfectly elastic, strict unanimity is crucial; any departure from 100% participation renders the cartel impotent. In contrast, if 50% of all people who benefit from clean air decide to "do their part" by buying low-pollution cars, they can make a significant dent in the problem. As long as the outsiders already pollute to the selfishly optimal point, an improvement in the level of air quality has no effect on their marginal incentive to pollute. Half of the drivers pollute less; half pollute the same; air quality improves. Of course, neither the cartel nor the clean air movement fully solves its public good problem. The point is that voluntary pollution abatement is a partial success, whereas the voluntary cartel is a full failure.

In July 1993, Bryan Caplan wrote Outline of a Critique of Tyler Cowen's "Law as a Public Good", in August 2004, Jay McCarthy read it.#

The summary provides a good picture of what the issue is:#

Many critics of free-market anarchism have argued that collusion rather than competition would prevail, making anarchism no more attractive than government. However, up to now very little attempt has been made to justify this claim. On its face, the idea that defense services are a natural monopoly is highly implausible, as David Friedman points out in his _Machinery of Freedom_.

It is for this reason that Tyler Cowen's recent critique of anarchism is a major contribution to the debate. For in his "Law as a Public Good: the Economics of Anarchy," Cowen puts forward a powerful reason to buttress the view that collusion would prevail. There are certain industries, which we may call network industries, that have a peculiar feature: competing firms must also cooperate (to some extent) with their supposed competitors in order to be in business in the first place. Normally, competitors have no reason to trade with each other -- why should one supermarket have any dealings with another? But this is not always the case: in industries like credit cards, banking, and franchises, competing firms must also cooperate. [...]

Well, so what? Why does it matter that in certain industries, competitors must also cooperate to a limited extent? The answer is that this industry structure can make collusion work. [...]

What does all this have to do with the viability of free-market anarchism? Cowen's answer is that the defense industry is a network industry. Just like the industries discussed earlier, defense firms must cooperate with their competitors (to a limited extent) in order to do their job. In the event of a dispute, competitors must agree to arbitrate with their rivals in order to preserve peace. (Moreover, all of the advocartes of anarchism have forcefully argued that any sensible businessman would do precisely that.) But the very possibility of peaceful cooperation between competitors indicates that we have a network industry on our hands; and such a network, immune to the usual checks against collusion, is likely to suppress competition in the mutual interests of the members. In particular, since the defense industry, taken as a whole, has a near-monopoly on force, the entire society would be in danger should the various firms in the industry succeed in colluding. The united defense industry could do whatever it wanted. Anarchy would be transformed in a state of the worst sort.

Caplan's critique makes us of a few points:#

• Competing Networks
• Private Supply of Public Goods for Self-Interested and Altruistic Purposes (This contained some insightful nuggets.)
• Varying Degrees of Network, due to:
  
  • Degree of Linkage Amongst Members
  • Lumpiness of Transactions
  • Service-Oriented or Member-Oriented Networks
  • Origin of Network: Designed or Evolved?
  • Independence from the Network
  • Propensity to Use Collusive Power

He then deconstructs a possible defense industry and tries to ascertain if it would be a powerful, collusive network industry. The resolution is "No." And it centers on the: local nature of crimes, general independence of criminals, its relation to common law, and the diverse variants of defense a firm may pursue (some that exist today.)#

Finally, Caplan makes an interesting observation and briefly describes his version of anarchy. I found the observation to be very insightful:#

As I suggested in conversation with Cowen, people seem to behave "altruistically" ("ideologically" might be a more neutral word) in one sphere of life but not the rest. In their role as private individuals, people give huge amounts of money to charity. But very few businessmen run their businesses like charities, even if they are charitable people. (Even there, though, most people wouldn't murder for a living, even if the pay were good.) Perhaps this is a way to solve Cowen's paradox, that if private supply of public goods works, then collusion works, and if collusion doesn't work, then private supply of public goods doesn't work either. If people are (somewhat) ideological qua private individuals, but profit-maximizing qua businesspeople, then both good results (non-collusion and private supply of public goods) can spring from the same group of people.

Another related observation: While in their business roles people are probably less charitable than in their private roles, most businesspeople still feel somewhat constrained by morality. Most wouldn't murder or steal to increase profits. In a way, the business role tends to relax some, but not all, of the moral constraints that they feel as individuals. (Not that this is a bad thing -- I agree with Milton Friedman that managers should be charitable with their own money, not their stockholders'.) Compare this to the governmental role: this seems to relax almost all of the moral constraints that people feel. It is a truism that the gentlest people will kill for their governments; but how many would kill for their employers? So perhaps this is another reason (and not just a deus ex machina) to think that ideological constraints on abuse of power would work better in an anarchist society.

Bryan Caplan writes in Rational Ignorance vs. Rational Irrationality on a possible new way of thinking about public choice economics.#

Beliefs about politics and religion often have three puzzling properties: systematic bias, high certainty, and little informational basis. The theory of rational ignorance (Downs 1957) explains only the low level of information. The current paper presents a general model of "rational irrationality," which explains all three stylized facts. According to the theory of rational irrationality, being irrational - in the sense of deviating from rational expectations - is a good like any other; the lower the private cost, the more agents buy. A peculiar feature of beliefs about politics, religion, etc. is that the private repercussions of error are virtually nonexistent, setting the private cost of irrationality at zero; it is therefore in these areas that irrational views are most apparent. The consumption of irrationality can be optimal, but it will usually not be when the private and the social cost of irrationality differ — for example, in elections.

The paper takes the one idea--that irrationality is an economic good--and sees what comes out when it is examined.#

Wittman points out that "If voter misinformation were an important reason for poor policy choices, then we should be able to observe more informed voters making better policy choices." (1989, p.1401) But in fact, more educated voters seem as likely to support e.g. "pork-barrel" spending as anyone else, even when they do not directly benefit. Stark, Iannaccone, and Finke (1996) and Iannaccone (1998) make a similar point about the rationality of religious belief: Religiosity has not decreased as education levels have risen, and for the most part religious participation and education are positively, not negatively correlated. If all mistakes were the result of ignorance, one would expect intelligence and education to make errors smaller and less likely. But if mistakes are the result of tastes for irrational beliefs, the connection between intelligence, education, and error is less clear-cut. The cognitive elite may get passionately attached to beliefs about topics that most people never even think about. Even the "experts" may be highly informed about nothing other than their profession's shared illusions if employment and pay bear little relation to the correctness of the expert's opinions. As Orwell (1968) smartly put it, "One has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool."

The conclusion:#

The political scientist Gaetano Mosca laid down a powerful challenge to economics: "Economic science has penetratingly investigated the laws that regulate the production and distribution of wealth. It has as yet done little with the relations of those laws to other laws that operate in the political organization of human societies. Economists have not concerned themselves with those beliefs, those collective illusions, which sometimes become general in given societies, and which form so large a part of the history of the world - as has been well said, man does not live by bread alone." (1923, p.328) While some economists argue that irrationality cannot be reconciled with the economic approach to human behavior (e.g. Becker 1976b, pp.11-13), the application of the economic way of thinking to irrationality can also be seen as a striking vindication of economic imperialism.